Give and Save: Use Your RMDs to Optimize Your Retirement and Help Others

by | May 16, 2023 | Blog

By Adam K. Wright, CFA®, CFP®

One of the secrets to living a full life is generosity. You work hard for what you have, and there is no better feeling than the opportunity to help others. Retirement can be many things, but making a difference in someone’s life brings a sense of fulfillment that few things can. When we look back at our lives and the many blessings we have, we feel this urge to pay it forward.

Giving to charity is a fantastic way to give back to those in your community and specifically those in need. Having a charitable giving strategy can form the bedrock of retirement legacy plans. But did you know there is a way to be charitable and still make your money work for you? When you save money with your taxes, you have more opportunities to help others.

Consider using your required minimum distributions (RMDs) for charity: instead of transferring the money into your bank account, you can send your RMDs straight to a charity. Referred to as a qualified charitable distribution (QCD), let’s explore how this option works and how it can benefit you and others during your retirement!

Benefits of Making a Qualified Charitable Distribution

While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself.

With the standard deduction so high, many taxpayers aren’t receiving tax benefits from their charitable gifts. When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. 

Are You Eligible to Make a Qualified Charitable Distribution?

Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made. 

In addition to having the right kind of account, these other requirements must be met:

  • You must be age 70½ or older.
  • To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
  • QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
  • Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
  • Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.

Is Your Charity Eligible to Receive a Qualified Charitable Distribution?

After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. 

On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:

  • Private foundations
  • Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
  • Donor-advised funds managed by public charities on behalf of individuals, families, or organizations

How Are Qualified Charitable Distributions Reported?

Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding. 

Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. No double-dipping allowed! Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records to document the fact that the QCD was in fact qualified. 

Keeping good records is critical. It is likely the 1099 you receive from your custodian will show the QCD amount on the tax form. It becomes the responsibility of the taxpayer (or their tax preparer) to properly adjust income on your tax filing for the QCD so no taxes are owed.

Work With a Professional

Retirement is an opportunity to celebrate the life you have worked hard to create; why not share it with others as well? And if you are going to give to charity, why not give in the most tax-efficient way possible? QCDs are a fantastic way to take your required minimum distribution and bless others too.

Charitable giving shouldn’t be complex, but you also want your distributions to meet the specific requirements to qualify for the exemption status. It’s always a good idea to work with a fiduciary financial advisor to help you make your QCDs the right way. At Wright Associates, our goal is to help you make a clear path toward your financial future. If you’re interested in learning more about QCDs or even just making a solid plan for your RMDs, our team is ready to work with you. Reach out to us and schedule a complimentary phone call to get started.

About Adam

Adam Wright is a CERTIFIED FINANCIAL PLANNER™ professional at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.

Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.


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